Entering into a licensing model is an excellent way to increase revenue. Companies can license their intellectual property, such as patents, trade secrets, software, and more, to boost revenue. For example, Tribe Property Technologies, a real estate tech company, reported a 74% increase in revenue by licensing its software in the property management space.
Licensing remains tricky, though. Any gap in the licensing agreement directly hits the company's bottom line and invites lawsuits. Not so long ago, a tech giant like Google was fined €250 million in France due to a gap in licensing agreements. So, even established companies still fall in trouble with licensing.
Then, how can one create a solid licensing agreement? Learn everything about licensing agreements: definition example, types, benefits, common struggles, the impact of breaches, and more in this post.
What is a licensing agreement?
Licensing agreements are legal agreements that authorize one party (licensee) to use the intellectual property of a company/individual (licensor). In most cases, licensing is done for intellectual property, such as patents, trade secrets, trademarks, software, etc. However, in some cases, the licensing is also done for a physical property like real estate.
Key terms in a licensing agreement
Some key terms to be included in licensing agreements are:
1. Parties involved
Who is the licensor and licensee? Add their business names, contact details, and legal entities.
2. Property
What is getting licensed? Patents, trademarks, copyrights, trade secrets, software, real estate, etc.
3. Scope of the license
Mention the specific rights and restrictions associated with the license. Is it an exclusive or non-exclusive license? Are there any geographic limitations? Can the licensee use the property only in specific territories or target markets?
4. License duration
What is the duration of the license? Is it a limited-term license with a specified expiration date, or is the licensor offering a perpetual license?
5. Payment terms
Finalize the payment terms (royalties and any additional financial obligations) with the frequency of payment.
6. Termination conditions
Can the agreement be terminated before the scheduled duration? If yes, what are the conditions for it? Often, breach of contract is a primary reason for early termination. You can mention what would be considered a breach and what steps to be followed after a breach. We will cover more on this topic later in the post.
7. Dispute resolution
Define how the involved parties will resolve disputes (if any) during the agreement. It could be negotiation, mediation, arbitration, or litigation.
8. Governing law
Specify which jurisdiction's laws will govern the agreements. It is especially important if the parties are located in different jurisdictions. Both parties have to follow the laws set by the governing law in any disputes.
Sample licensing agreement
Reduce risks by creating a strong licensing agreement. Download the Licensing Agreement template now.
Types of licensing agreements
Here are the most examples of licensing agreements:
1. Trademark licensing
Trademark licensing agreements allow a licensee to use a licensor's trademark, logo, or brand identity for specific purposes. It helps the licensor to expand in new markets and increase revenue by just providing its brand name and not actually working on it. For instance, a sneaker brand can license its trademark to an athleisure brand. It allows the athleisure brand to launch a clothing line with the sneaker brand name. The athleisure brand (licensee) gets good visibility, and the sneaker brand (licensor) makes good revenue by providing a license. It's a win-win.
2. Trade secret licensing
Trade secret licensing agreements grant permission to licensees to use confidential business information or proprietary knowledge of licensors. Common trade secrets are business processes, proprietary knowledge or software, etc. Businesses often license their trade secrets to form strategic partnerships/collaborations and expand their reach.
3. Copyright licensing
Copyright licensing agreements are legal contracts that allow the licensee to use the copyrighted material from the owner (licensor). Usual copyrighted materials are images, music, videos, written works, or educational materials. Businesses take copyrights to reuse copyrighted content in their work. For instance, a business may want to reuse a song in their advertisements. In that case, they have to get a license for the song from the music label.
4. Patent licensing
A patent licensing agreement allows the licensee to use patented technology or innovation of the licensor (patent holder). Licensors can enjoy being an innovator alone and earn revenue by licensing their invention to other businesses. These businesses have the right setup and funds to help the invention reach new markets.
5. Software licensing
A software license agreement is a contract between the software developer (licensor) and the end user (licensee) outlining the terms and conditions for software usage. These agreements define the permitted use of software and payment terms. It prevents unauthorized copying, distribution, and modification of software.
6. End-user licensing
An End-user license agreement (EULA) is also a legal contract between a software provider and the user. It is similar to the software license agreement. However, software license agreements are broader terms. It covers different types of users: businesses, organizations, or other entities, in addition to individual users. However, EULA focuses on individual users.
7. Franchise licensing
A franchise agreement is a legal contract that allows a franchisee (licensee) to run a business using a franchisor's (licensor) brand and systems. This agreement outlines the terms and conditions of the arrangement, mainly:
- What brand trademarks the franchisor is allowed to use?
- What systems are franchisors supposed to follow?
- What penalties can a franchisor face for not meeting the brand's process?
Benefits of licensing agreements
Licensing agreements work well for both licensors and licensees in the following ways:
1. Boosts revenue
Licensors get royalty payments by licensing their intellectual property. For instance, Adobe earns revenue from licensing its creative software suite, including Photoshop and Illustrator. Its annual revenue is approximately $21.5 billion.
Licensing agreements allow the licensee to improve revenue by using an existing property to improve their business functions, launch new products, or brand their existing products. For instance, Lego, a toy brand, has been able to maintain its popularity by taking licenses for popular Disney, Star Wars, Harry Potter, and Jurassic Park characters and creating branded products.
2. Expands market
With licensing agreements, licensors can enter new markets even without having a physical presence there. All they need is the right partner as a licensee who can take the business ahead.
3. Improves brand visibility
Licensing allows a brand to create its presence in new markets or even in parallel categories. It also results in meaningful collaborations that can be instrumental in the brand's long-term growth. For instance, Nike has licensing agreements with sports leagues like the NBA and NFL to produce branded apparel and merchandise. These strategic partnerships will further improve brand visibility for Nike.
4. Reduces risks
Licensing reduces risks for both the licensor and licensee. Licensors can reach new markets without much financial investment. On the other hand, the licensees can get a license for a proven product or established brand and quickly establish themselves in the market. There is also an intellectual property law also that protects the rights of property owners of their creation. Licensing agreements clearly lay down the usage rights for licensees and prevents them from landing in any legal trouble.
Breach of a licensing agreement
Breaches can happen on both the licensor and licensee end.
Common types of breaches that a licensor can face are:
- Unauthorized use of the licensed property
- Non-payment of royalties
- Quality control violations or any activities that harm licensor brand
- Copying or infringement of the licensed property.
Licensee can also face these breaches:
- Breaching exclusivity rights and providing a similar license to another party
- Failure to maintain required quality and support of licensed property.
Consequences of breach of licensing agreements
Breaching a licensing agreement can lead to potential indemnification obligations, legal action, or termination of license. Both parties have to follow the dispute resolution methods (negotiation, mediation, arbitration, or litigation) mentioned in their licensing agreement. The lawsuit will follow the governing law mentioned in the agreement.
Creating a licensing agreement
You can create a licensing agreement by following these steps:
- Identify licensed property and parties: The first step is to identify the intellectual property that is getting licensed. Also, who are the involved parties in this equation: licensor and licensee?
- Finalize key terms: The next step is to negotiate and finalize these key terms: scope of the license, license duration, payment terms, termination condition, and dispute resolution.
- Draft and review: Once the terms are finalized, you can draft the agreement and review it internally.
- Execution: After the licensing agreement review, it can be signed electronically by both parties via a contract management platform.
Also read: How to review End-User License Agreements and Software Licensing Agreements
Common struggles in managing licensing agreements
Here are the common areas where companies falter when creating/managing license agreements and how a contract management solution can solve them:
1. Leading negotiations
Negotiating a licensing agreement can be tricky as there are many terms upon which both parties have to mutually agree. A seasoned player can take the entire conversation in their favor.
Source: Daniel J. O'Connor LinkedIn
Solution
Contract management solutions help you create a clause library for different use cases. You can create standardized base terms of licensing agreements for your company. Having these terms handy will help your team members lead the negotiations.
2. Missing terms
Missing even the smallest of detail in licensing agreements can lead to bigger financial impact. While one may think it would be rare to miss a detail in such crucial agreements. Experts speak about how missing small details is one very common issue in licensing.
Source: Christopher Lincoln via LinkedIn
Solution
Contract management solutions allow the creation of templates for agreements for different use cases. Users fill in the details in the existing template to create any new agreement, and it ensures they are not missing any necessary terms. A contract management solution also creates a streamlined approval workflow to ensure any contract is executed only when it is thoroughly approved by all internal key stakeholders.
3. Obligation management
Tracking and monitoring that all parties are meeting the required obligations in licensing agreements is another challenge. The struggle increases when you are dealing with a huge number of agreements.
Solution
A contract management solution controls the storage of all agreements on one platform, making tracking easier for you. Further, advanced contract management solutions also provide AI features that can pull only key terms or create summaries to highlight only the required obligations from each document. You can easily follow up with the other party based on this information.
SpotDraft AI helps to pull contract metadata and key terms quickly
4. Missing deadlines
With a huge contract volume, there is a chance to miss the termination or renewal of any contracts. Timely renewals are necessary to continue a service. In some renewals, you may also need to negotiate the terms for the best interest. There are post-termination procedures as well for ending a contract and returning necessary data.
Solution
Contract management solutions allow you to set reminders for key dates so you are not missing any important milestones.
SpotDraft reminders
5. Maintaining compliance
Maintaining compliance is another challenge in licensing agreements, especially when dealing with parties in multiple geographies.
“Owing to our operations in multiple geographies, a lot of work our team gets is on the lines of contracting and compliance. We are also required to be extremely familiar with licensing requirements of the countries within which we plan to expand. Understanding licensing and applying for the same considering all compliance requirements is a major part of what we do.”
~ Juliette Thirsk, Head of Legal at Peach Payments
Streamlining Legal at a FinTech Startup
Solution
Contract management solutions with AI features provide automated suggestions to ensure you are able to identify risks early on during reviews.
SpotDraft’s AI extension provides automated suggestions during reviews
Standardize licensing agreements with SpotDraft
SpotDraft is a contract lifecycle management platform that helps you manage your licensing agreements end-to-end effectively.
Using SpotDraft, you can:
- Create a clause library to lead negotiations
- Create contract templates for licensing to fastrack contract creation
- Set contract approval workflows to streamline internal reviews
- Review licensing agreements quicker with AI-enabled suggestions backed by custom playbooks
- Get eSignatures on licensing agreements and automate reminders
- Enable clickthrough on end-user agreements that can be accepted by a single user tap
- Track termination and renewals easily to take the next steps.
Take the first step towards smarter, faster, and more efficient licensing contract management. Book a free demo today to simplify licensing.
Frequently asked questions (FAQs)
1. What are the most common license agreements?
The most common examples of licensing agreements are trademark, trade secret, copyright, patent, software, end-user, and franchise licensing.
2. What is the licensing agreement of IPR?
An intellectual property rights (IPR) agreement allows one party (licensee) to use the intellectual property of another (licensor). Common intellectual property that are licensed are patents, trade secrets, copyrights, and software.
3. What is the licensing model?
A licensing model allows one party (licensee) to use the intellectual property of another (licensor) in return for agreed-upon financial returns. Common intellectual property that are licensed are patents, trade secrets, copyrights, and software.
